đ© The New Digital Bond
Exploring the merit of private blockchains. And Peter Thiel cashes out.
The New Money Brief covers the global rise of digital currencies and how they are disrupting the world of payments, and much else.
Delivered several times a week. Created and edited by Marc Andrew.
Over the past few weeks, the European Investment Bank (EIB) has quietly been driving a landmark event in the history of global finance.
And it raises interesting questions.
In November the European Investment Bank issued the world's first fully digital-native bond on a private blockchain run by Goldman Sachs.
âDigital-nativeâ means the instrument is fully engineered for the internet. Or as its proponents describe: âthe full complexity of rights, obligations, and cash flows throughout the lifecycle of the asset will be run within a contained, private blockchainâ.
A full digital bond is brand new and as innovative as the introduction of paper-based promissory notes centuries ago.
Goldmanâs CEO David Solomon mentioned the project in a December op/ed, and it was given more detail this week in a joint news release by Goldman and the tech firm Digital Asset.
The question is, why bother? What problem does a digital bond fix?
The typical security or bond sale takes up to 5 days to "settle", or become fully official on the ledgers of everyone involved. In this case, the bond settled within 60 seconds.
Thatâs a huge efficiency across financial markets. When money has to wait 5 days to settle, itâs locked away that entire time. Settling immediately frees up the cash and accelerates finance.
That's why BlackRock CEO Larry Fink recently said he thinks crypto's lasting use case will be the "immediate settlement of tradable securities."
The question all this raises is in the concept of a private blockchain.
The original blockchain - Bitcoin - is not privately maintained. It is open source and permissionless, meaning anyone can plug in.
Private blockchains are inspired by bitcoin and seek to advance on it. Will they endure?
The history of internet may hold lessons.
At one time, âprivate internetsâ - walled gardens - were common. Remember AOL? Those didnât last.
And there were protocol wars among different versions of the internetâs basic layers too, not very long ago. The contemporary version of this is the Layer 1 contentions in crypto - most notaby between Bitcoin and Ethereum.
Ultimately, an open standard, TCP/IP, won the protocol wars and became a dominant base layer for the entire internet. I donât think think anyone would argue thatâs not been an incredibly good thing.
Will one protocol come to rule the internet of money?
Bitcoinâs advocates believe it holds promise, and there are projects that seek to scale bitcoin through layers and even introduce tokenized assets (like digital bonds) to be offered on bitcoinâs open blockchain.
Lightning Labs is leading a notable effort called Taro, and there are others.
And of course a whole world of developers (including the EIB itself) are offering digital assets rooted on the Ethereum blockchain.
Ultimately, even if digital bonds can safely and quickly be issued on Bitcoin or Ethereumâs open blockchain, would that be enough to entice major bond issuers away from the friendly confines of Goldman Sachs?
That seems doubtful. But there was a time when it was hard to bet against AOL too.
Iâd love to know what you think. And enjoy your weekends!
Marc.
â«ïž âFounders Fund, the venture capital firm co-founded by billionaire Peter Thiel, closed almost all of its eight-year bet on cryptocurrencies shortly before the market began to crash last year, generating about $1.8bn in returns.
The San Francisco-based fund made its first investment in bitcoin in early 2014 and went on to invest large sums in crypto. About two-thirds of its overall investment was used to buy bitcoin, said people close to the fund. Founders Fund sold out of the vast majority of its entire cryptocurrency portfolio by the end of March 2022 â before the digital assets market became swept up in a crisis in May last year, said one of the people close to the fund.
The fund currently has no significant exposure to cryptocurrencies, the people said. The winding-down of its crypto bet has not previously been reported. Founders Fund declined to commentâŠâ
Source: Financial Times
â«ïž âNew products and innovation are needed to broaden access to the global financial system, participants on a Davos panel said Tuesday.
At least two billion people live outside the financial system, and at least another two billion are poorly served, and pay high fees or interest rates for services for which the wealthy pay much less, said Dan Schulman, chief executive of PayPal.
âWe have a good financial systemâŠbut I donât think itâs doing the job that it needs to do, which is being an inclusive economy that brings everybody in together,â Mr. Schulman saidâŠâ
Source: WSJ
â«ïž âSoundboxes â hardware used by merchants that emits sounds every time a mobile payment is made â have taken off in India, where point of sale activity can get busy and voice alerts from the soundbox help alert multitasking shopkeepers and assistants to a transaction going through.
Now, to keep pushing ahead to build out its own payments business in the worldâs second-largest internet market, Google is getting in on the act.
The internet giant, which is currently one of the mobile transaction leaders in India with Google Pay, is piloting a soundbox of its own in the country to alert sellers of confirmations for UPI payments â a mobile payment standard developed and now ubiquitous in India for instant payments and transfers between banks, or two mobile users, or a customer and a merchant.
Sources tell us that Google has started distributing its white-labeled speakers â branded Soundpod by Google Pay â in a few markets across North India, including New Delhi, working initially with a limited group of shopkeepersâŠ
Source: Techcrunch
At Davos, Goldman Sachs CEO David Solomon said his bank was too ambitious launching consumer credit, after it posted a big loss in the division mostly due to Apple Card in 2022.
Goldman Sachs spent a lot of money to help launch Apple Card and its other consumer services. A report from January 13 revealed the bank's consumer credit division lost $1.2 billion in nine months last year, and the losses were primarily related to the Apple Card.
"In the consumer platforms, we did some things right. We didn't execute on some others," Solomon told CNBC on Wednesday. "We probably took on more than we should have, you know, too much, too quickly."
Goldman helped launch the Apple Card in 2019 and reportedly spent roughly $350 to acquire every new Apple Card customer. And in 2022, it scaled back its efforts to turn its consumer savings business, Marcus, into a fully-fledged digital bankâŠâ
Source: Apple Insider
â«ïžâRapid changes in the payments space have given regulators and legislators plenty to focus on, and this year, thatâs likely to include buy now, pay later, peer-to-peer payment fraud and swipe fees.
âThereâs just much more activity and concern about these payments issues than has been true maybe at any other time,â said Doug Kantor, general counsel for the National Association of Convenience Stores.
Recent actions, including the Federal Reserveâs debit rule clarification and the Federal Trade Commission ordering Mastercard to stop blocking merchantsâ use of competing debit networks, suggest the payments industry faces more regulatory scrutiny than ever before. Kantor noted itâs rare that such industry events involving different federal entities would occur within months of each other.
Issues such as open banking, privacy and data issues and cryptocurrency also are expected to draw regulatory attention in the coming months. Thatâs against a backdrop in which Consumer Financial Protection Bureau Director Rohit Chopra has taken an interest in payments; the Biden administration is pursuing antitrust concerns; and a new chairman of the House Financial Services Committee, Patrick McHenry, (R-NC), has taken control of a powerful committee overseeing fintech and payments issues. The Senate remains under Democratic controlâŠâ
Source: Payments Dive
â«ïž'A new report by Bank of America says that central banks and governments will be at the forefront of driving the digital asset revolution. Â
According to the research, âCBDCs and stablecoins are the natural evolution of money and payments.â Alkesh Shah, lead analyst for the Crypto Research Team at Bank of America said that central bank digital currencies have, âthe potential to revolutionize global financial systems.â He also believes that CBDCs could be the most important technological advancement in the history of money.Â
CBDCs use blockchain technology, or more specifically, distributed ledger technology or (DLT). This type of technology enables governments to retain control of the money supply. Plus, a central entity will determine which financial entity will oversee the distributed ledger. Bank of America believes that developed countries will focus their efforts on the efficiency of payments, while countries with developing economies will hone in on financial inclusion...â
Source: Payments Journal
â«ïžâThe United States may have conceded a head start to other nations in "setting global standards for the future of money" regarding central bank digital currencies (CBDC), but in the future the country "should lead the development of an international regulatory framework around digital currencies," the Digital Dollar Project (DDP) said on Wednesday.
In its updated white paper, the DDP, a nonprofit organization advocating for a U.S. CBDC, said the U.S. should set that regulatory framework "independent of a decision to deploy a U.S. CBDC."
More than 100 jurisdictions around the world are researching or developing a CBDC but the U.S. remains cautious on the merits of a CBDC.
"In the coming CBDC future, the U.S. should actively lead global discussions on governance, interoperability, security, privacy and scalability standards rather than reacting to foreign CBDC decisions," the DDP wrote.
The DPP laid out a series of warnings about the United States' cautious approach, calling it "a conspicuous absence" and an "unsustainable position..."
Source: CoinDesk
â«ïžâNew Hampshire Governor Chris Sununu released the final report and recommendations compiled by the Governorâs Commission on Cryptocurrencies and Digital Assets.
The final report was unanimously approved by the Commission at their December, 2022 meeting, with abstentions by the two members representing state agencies having responsibilities for administering laws that apply to crypto-asset activities.
Among the findings of the Commissionâs report, as presented in the Executive Summary:
Blockchain technology (digital databases secured by cryptographic software protocols distributed across connected computers) appears to be an important technical innovation with many potentially important applications in our human societies and economies;
The legal and regulatory status of Blockchain technologies and applications such as Cryptocurrencies and Digital Assets is highly uncertain, and this legal and regulatory uncertainty is materially undermining innovation and economic development of new technologies, activities, and industry, and protections for investors and consumers;
New Hampshire government (Governor, Legislature, Executive Branch agencies and courts of our Judicial Branch) should devote resources to establishing a state legal regime that will offer an attractive jurisdiction for the best responsible Blockchain innovators, entrepreneurs and businesses, while protecting investors and consumers who use their applicationsâŠâ
Source: State of New Hampshire
â«ïž âFor fast-growth startups, the early days can be thrilling. You have come up with a great new product or service, found the perfect marketing strategy, and hit gold with a rapidly expanding customer base. The next step is obvious - strike out from home and try to replicate your success in global markets.Â
Often, that's where things come grinding to a halt. Faced with what is a highly complex maze of foreign legislation, unfamiliar best practices, and outdated infrastructure, making international payments â even simple transactions like paying a seller or receiving funds â becomes a nightmare of multiplying intermediaries, spiralling costs, and increased operational friction. It's little wonder that according to a survey by Wise, 51% of growing businesses are put off overseas expansion because of the complexity of managing international payments.
This complexity shows no sign of diminishing anytime soon. Solutions that can support the full payment stack tend to be heavily regional. Whereas with many global solutions that are emerging, the trade-off is that they only support a specific function, such as payment acceptanceâŠâ
Source: Finextra
â«ïž"âWhen Mastercard was blindsided in the final weeks of the year by a proposed consent order with the Federal Trade Commission around violations of debit-routing rules, a key question was how Visa and several large issuers involved in similar business practices escaped censure.
The FTC hasn't said whether other enforcement actions are in the works, but public comments due Feb. 13 could shed light on why the FTC singled out Mastercard. The relatively short 30-day comment window suggests the FTC won't wait long before finalizing its latest action, leaving room for other potential disciplinary moves.
So far Mastercard appears to be taking sole blame for the effects on debit-routing of widespread industry practices around tokenizing, or encoding card numbers for security and streamlined processing. Merchants say tokenizing thwarts their ability to route online debit transactions to lower-cost debit networks, a requirement of Regulation II under the Durbin amendment, part of the Dodd-Frank ActâŠâ
Source: American Banker
â«ïž âIndiaâs dealings with American card networks has been frosty. Visa Inc. and Mastercard Inc. have grumbled to Washington about the lack of a level playing field as New Delhi has cajoled banks to shift to a homegrown alternative. For their alleged failure to comply with local data-storage rules, Mastercard, Discover Financial Services and American Express Co. have run into regulatory trouble in the second-most-populous nation. Recurring payments from the country have been a disaster for failing too often.
It may be time for a thaw in the relationship. According to news portal The Morning Context, the Reserve Bank of India is keen to grant Visa and Mastercard access to the countryâs popular online payments protocol. Itâs like dangling the key to a candy store before a kid: From large malls to roadside shacks, there are now 230 million QR codes set up to receive money. This is when the country of 1.4 billion people has only 7.3 million point-of-sales terminals that swipe cards.Â
Many emerging markets have warmed up to smartphones ahead of plastic and expensive card readersâŠâ